The US Treasury Department said that Beijing had reached an "in substance" intergovernmental agreement Model 1 (IGA 1) with the US. Photo: AFP

Beijing to back United States over new Fatca law against tax evasion

Central government co-operates with Fatca law, easing blacklist threat to Chinese institutions and boosting its own battle against corruption

Mainland China has been included on a list of jurisdictions co-operating with the United States on a new law to halt tax evasion.

It removes the threat of blacklisting or penalties that had been hanging over Chinese financial institutions. The inclusion will also benefit institutions in Hong Kong, the US and elsewhere with subsidiaries in mainland China.

The Foreign Account Tax Compliance Act (Fatca) is a US law that requires financial institutions around the world to provide information on US taxpayers to the US government. The Treasury Department said on its website that Beijing had reached an "in substance" intergovernmental agreement Model 1 (IGA 1) with the US.

The move will enable Beijing to obtain information on mainland Chinese taxpayers in the US, which will help in its fight against tax evasion and corruption.

"It is important, as China was seen as the last major outlier in reaching an IGA with the US," said Charles Kinsley, a China tax partner at accounting firm KPMG. "Most major economies have negotiated an IGA, either formally or in principle."

Eric Boes, an international tax consultant at the trust company Amicorp, said: "I can imagine Beijing will want information on Chinese taxpayers abroad. A possible reason is that the government wants information on corrupt Chinese officials."

The US authorities will impose a 30 per cent withholding tax on US-related income going through financial institutions that do not comply with Fatca.

Richard Weisman, senior US tax partner with Baker & McKenzie, an international law firm, said that although Beijing had not signed an IGA, the US Treasury Department and US Internal Revenue Service (IRS) had said financial institutions in a jurisdiction with an "in substance" IGA would be treated as having an agreement until the end of this year.

"It is very important that China is deemed to have signed an IGA," he said. "With China deemed to have an IGA, withholding tax and many other obligations will not apply to financial institutions in China."

Kinsley agreed that the announcement of the mainland's in-principle IGA should alleviate the risk of a withholding tax, as most financial institutions on the mainland would have until December 22 to register with the IRS and they would be deemed "Fatca compliant" before then.

Keith Pogson, a senior partner at accounting firm Ernst & Young, said the central government had said it intended to sign an IGA before the end of this year. "The Chinese IGA is pretty good for business," he said. "The IGA ensures the continuity of normal banking relations between these two very important economies."

Pogson said if Beijing refused to sign an IGA, financial institutions in mainland China would be unlikely to provide information to the US government on US taxpayers, as required by Fatca, for fear of breaching mainland data privacy laws.

Non-Chinese banks like HSBC and Citi had subsidiaries on the mainland which were at risk of being blacklisted and penalised by the US if Beijing refused to sign an IGA, he said.

This article appeared in the South China Morning Post print edition as: Beijing to back U.S. over tax evasion